Sunday, February 23, 2014

Questioning the Basic Approach to Arts Funding - Learning from the Venture Capital Sharks: People v. Projects and Programs

Good morning."And the beat goes on...................."

Couple of things of interest before I get into this week's blog:

1. Westaf and the California Arts Council are co-hosting a remarkable Symposium: Creativity and Innovation in Public Education: Areas of Need, Mechanisms for Change.

The Symposium addresses research and policy work needed to advance creativity and innovation in public education. Sessions will include presentations on the neuroscience of creativity; evaluation of creativity-based curriculum; innovative approaches to advance arts, science, and technology education; design thinking in higher education; and creativity as collaborative practice. They have assembled a really quite impressive panel of presenters.

The sessions will commence on Tuesday, March 4th at 8:45 a.m. Pacific Time and conclude at approximately 4:30 p.m. Pacific Time that same day. The live streaming, provided courtesy of Charter Communications and the California Arts Council, will be accessible at no cost. Instructions for connecting to the streaming will be posted on the website, www.westaf.org, the week prior to the symposium.

2. Posted on the Arts, Culture and Education Forum Facebook page is a very useful list of links to celebrity postings in support of the arts. Check it out.

Sharktank and Venture Capitalist Approach to Funding - What we might learn from their approach:

In a complementary (and excellent) blog post (actually predating my post last week on the Arizona Art Tank experiment) by Ruth Levine (Program Director in the Global Development and Population Program) on the Hewlett Foundation website about lessons to be learned from the Shark Tank she suggested that we might think about the questions venture capitalists ask - including:

"How original is the idea, and/or how unique is the style and quality of the product?

How big is the market? Is this responding to existing demand, or is it such a new idea that it’s something no one thought they needed before?

Is the inventor able to sell an idea and execute on it, or is he or she just the “ideas person”? Is there a track record of earlier success?

What are the financial and other risks, and how are those risks going to be distributed among the parties?

What are the distributors through which the product gets to the market, and what do those distributors want, in terms of a cut of the profit or a chance to put their own brand on the product?

Those questions seem to me perfectly applicable to the arts sector. We need to start asking these and other hard questions on a regular basis. And we need to dig much deeper into whether or not a prospective grantee is realistically ready and able to make good on whatever it is they are 'pitching'. (A case in point: if not the rule, it is increasingly common for grantees to project income on their budget sheets that is really nothing more than Pollyanna optimism with little to no basis in reality. If an applicant to a prospective venture capitalist funder were to engage in a similar practice, they would very quickly be rejected out of hand. Yet arts funders too often simply accept budget income projections as reasonable fact. How can we make intelligent investments when we sanction that kind of sloppy vetting?).

Ms. Levine goes on to opine:

"Most interesting to me about Shark Tank is how the investors figure out whether they are a good match for the project, regardless of its intrinsic merits. They consider what they can bring through their own knowledge of the business sector, sales ability and professional network. When they invest and take a stake in the business, they are offering much more than money – often the money is relatively small potatoes – and they take seriously the time and other commitments required to give the enterprise a fighting chance. “Beyond the grant dollars” in a big way. So you hear them saying things like, “I could work with you to make this thing succeed, but I’m working on too many other high-effort projects right now, so I’m out.” Or, “I think you’re onto something, but I won’t have anything to bring to the table in your line of business.” Also fascinating is the interplay among the potential investors, which sometimes results in a multi-party deal, with each bringing distinctive ingredients and demands into the mix. All of these are analogous to our world of grant making."

I think she has hit the nail on the head, and raises a fundamental question about our whole underlying approach to funding - which is predominately to award grants to organizations with relatively little other involvement save for reports due. In some cases there may be site visits or interviews, but for the most part the grant is awarded or declined based on a written application. That approach is, of course, exactly what most arts organizations want - unrestricted operating dollars with minimal requirements to get it. But that is the diametric opposite of the venture capital model, and virtually no venture capital (Shark Tank) investment would ever happen without the investor being heavily involved in the launch (or ongoing business) of the recipient. Indeed, the venture capital model is built on their substantial involvement after the investment - as a way to protect that investment and to maximize the chances the venture will succeed.

As Ms. Levine notes: "we (nonprofits) have more nuanced and hard-to-measure strategies than the sharks’, which presumably is “make the most possible money.” Clearly, mission driven v. profit driven work are vastly different areas and approaches. And to be sure, most venture capitalist firms invest in relatively few projects in any given year - often only one or two (and thus it is much easier and more manageable for them to be "involved" with those ventures in which they invest.) Arts funders invest (award grants) to multiple (and often scores) of grantees.

But that caveat begs the question of how we can best maximize the positive impact of our arts funding - and increase the odds that our investments succeed. The issue is to what extent might it be smart on our part to be more involved with the organizations we fund (after we fund them); to insist on more than after the fact reporting. What would that mean?

For the Shark Tank and venture capitalists their involvement seeks to support those they invest in (and protect their investment by so doing) with their experience, business and financial acumen, networks, coaching, counseling and more. They often insist one of their people sit on the Board of the ventures in which they invest, and there are regular interfaces to monitor and nurture the growth of those investments.

They are particularly concerned with the leadership of the prospective investment companies, and spend considerable time ascertaining whether or not that leadership is qualified, whether or not it impresses them, whether or not it can take the embryonic organization into the future. In large part, they are investing not only in ideas, but in the people behind those ideas. Indeed, in one study on the criteria used by venture capitalists to evaluate new venture proposals, "five of the top ten had to do with the entrepreneur’s experience or personality. There is no question that irrespective of the horse (product), horse race (market), or odds (financial criteria), it is the jockey (entrepreneur) who fundamentally determines whether the venture capitalist will place a bet at all."

"The question is if this is the case, then why is so much emphasis placed on the business plan? In a business plan there is generally little to indicate the characteristics of the entrepreneur-it is generally devoted to a detailed discussion of the product / service, the market, and the competition. To us, the implications are obvious-such content is necessary, but not suficient. The business plan should also show as clearly as possible that the “jockey is fit to ride”-namely, indicate by whatever feasible and credible means possible that the entrepreneur has staying power, has a track record, can react to risk well, and has familiarity with the target market. Failing this, he or she needs to be able to pull together a team that has such characteristics and show that he or she is capable of leading that team."

I suspect that in our grant making process, in a very high percentage of cases, there is no attempt to interview or otherwise make calculated judgments on the leadership of the applicant. We don't go beyond the written application, save for perhaps some occasional anecdotal reference about who is involved. Is that smart? Sure, in some cases, the funder is familiar and knowledgable about the grantee's leadership. But in many, if not most, others - even where there is a longer term relationship with the grantee - the information is heresay at best, and virtually nonexistent at worst. Talk about taking an unreasonable risk. Funders will respond to that criticism by pointing out that they lack the people and time resources to engage in such due diligence. My response: then outsource the job.

In short the investor venture capitalist wants to do everything they can up front to insure that the ventures with which they are affiliated succeed, and at the top of that list is investing in people. These involvements are not transitory, and usually last for a considerable period of time. And rather than the companies in which they invest resenting or resisting that involvement, they welcome it for they understand it is precisely that kind of support that increases the odds they will succeed. Do they all succeed? Of course not; risk is inherent in venture capitalism and it ought to be inherent in arts funding as well. But calculated risk. Do we in the arts invest more in the program and organization than we do in the people? And should we reassess that strategy?

Is it reasonable then for arts funders to consider that it might be wise and appropriate for them to move from being 'passive' investors, to more 'active' partners? Would it be in both their interest (in pursuing their priorities and missions) and the interests of their grantees if they became more directly involved in providing the benefits of seasoned experience, business and financial acumen, networks and more to both the newer, smaller arts grantees and to those long established (obviously on a case by case basis). Would it be wise for arts funders to spend more time and energy vetting the leadership of their grantees and prioritizing the commitment to people (who can make things happen) as much as to projects? We increasingly emphasize entrepreneurship, but are we actually trying to figure out what that means and how to judge its potential?

I'll grant you that some of that already goes on. Funders in specific cases do get more involved in trying to support grantees - both directly and by providing consultants or other outside support to specific grantees. But it is not the norm, not an underlying principle applied across the board - but rather a more isolated and random approach. Perhaps funders ought to consider how they might (individually and collectively in possible collaborations) organize on a larger scale those resources that might (ala the venture capitalists) increase the success level of their grantees by supporting them with more involvement. What, for example, might a funder do systemically to provide more professional development opportunities to its grantees? Does it any longer make any sense to like (fund) a project or an organization without such involvement over time to maximize the chances that project and organization will succeed?

In all probability many current and potential grantees would not like that approach and would argue (at least the larger, more established grantees) that more funder involvement - no matter how well intentioned and even reasonable on its face - is unnecessary and possibly even counter productive. But the evidence of the past half decade of organizations - even big ones - making bad decisions and failing or coming close to failure (at a very high cost to the whole field) belies that objection. Others would argue that the profit motive of the venture capitalists is so foreign to our motives (of mission) that the whole idea doesn't make sense. But the real motive of venture capitalists is to enhance shareholder value (which may or may not dovetail with bottom line profits at any given point in time), and the nonprofit arts organization's mission motive is really not that different (for it too seeks to maximize shareholder value - in our case the shareholders are the public, and the value is not net worth but in achieving our mission(s).

So how do funders - with relatively small staffs and the reality that they make far more investments in a given year than the average venture capitalist - move from passive grantmaking to a more active approach in providing expertise, experience, business and financial skills, leadership development and a host of other support tools?

First, as this amounts to a fundamental shift in some of the basic underlying principles of grant making, they would have to purposefully change the culture of how they approach their fund making. While even piecemeal change would arguably be a better approach, real involvement will demand more wholesale changes in our approach.

Second, they would need to figure out how to organize the provision of that support - which might entail more consultants on retainer (and to be more cost effective the option of doing that in collaboration with other funders), expanded in house staffing to mange their increased involvement, and other ways to systemically provide that involvement support.

Third, they would need to allocate whatever portion of their annual funding budget was necessary to accomplish the objective of "involvement" (including outsourcing some of that support) - which would likely necessitate yet another look at the now familiar question of "fewer, but larger grants, or an increased number of smaller grants to more recipients.

As this would be a paradigm sea change away from some of the underlying assumptions on which arts funding has for a long time been based, such a wholesale change would be very difficult - likely to be met with resistance. But the question remains: Is the way we currently make investments in our field (with little involvement after the grant award), the smartest, most effective, most efficient way for us to nurture and support the missions of our arts organizations and those of the funders themselves?

I think the current approach of non involvement is simply the easiest way out for the majority of funders - and for grantees too. Becoming more involved with grantees is more work for both the funder and the grantee, more of a commitment than funders or grantees want to make. But we really do have to ask whether or not our failure to do more than simply write checks is maximizing the chance for the success of the organizations in which we invest. And in truth, much of our grantmaking is not much more than writing checks. Enough to give a venture capitalist nightmares.